Non-US Supranational Panel Margaret Kerins, CFA Head of Fixed Income Strategy Margaret.Kerins@bmo.com 312-845-2687 Dan Krieter, CFA Dan.Krieter@bmo.com 312-845-4015 November 7, 2018

USD SSA Market Grows While GSEs Shrink SSA Strategy USD SSA Market Grows While GSEs Shrink USD Non-DN Debt Outstanding ($ bn) US agency non-DN outstandings have shrunk by over $800 bn since 2008, or by 40%. The USD SSA market has grown to 77% of the non-DN US agency market, compared to 23% in 2008. Net Issuance since the financial crisis US Agency: -$841 bn USD SSA: $569 bn USD Net Non-DN Debt Issuance ($ bn) Source: FNMA, FHLMC, FHLB, FFCB, Bloomberg

Agency Issuance Declining SSA Strategy Agency Issuance Declining FHLB and FFCB now the dominant issuers in the agency market DN and floater issuance has increased while the bullet and callable markets shrink at all four GSEs Bullet issuance difficult to find in the agency market. Likely diversification needs as FHLB and FFCB represent the best way to add term debt. 2015 Net Agy Issuance ($ bn) 2015 Net Agy Issuance ($ bn) Source: FNMA, FHLMC, FHLB, FFCB

Reform: Decline the Only Certainty SSA Strategy Reform: Decline the Only Certainty FNMA and FHLMC expected to continue shrinking until $250 bn floor is reached in 2018. Debt used to fund retained mortgage portfolios will not be a feature of whatever shape housing finance reform takes. Bottom Line: Under every regulation bill yet introduced to Congress, FNMA and FHLMC are wound down over a five year period, after which all remaining debt is explicitly guaranteed. 2015 Net Non-DN Agy Issuance ($ bn) Source: FNMA, FHLMC

What Is the Most Logical Replacement for Agency Debt? SSA Strategy What Is the Most Logical Replacement for Agency Debt? MBS? Prepayment/Extension risk; Uncertainty over mortgage market reform. Corporates? Credit and liquidity risk High Quality Market Supranational – International organization whose mandate extends across national boundaries e.g. IBRD (World Bank), EIB (European Investment Bank), AfDB (African Development Bank). Typically backed by paid-in and callable capital of member countries. Sub-Sovereign – Public debt at a sub-national level e.g. Canadian Provinces. Non-US Agency – Public and private entity that typically functions for a social or public need e.g. KfW (Kreditanstalt für Wiederaufbau), EDC (Export Development Bank of Canada).

SSA Strategy SSA Analysis Checklist Purpose Parent Country/Countries Key Factors of SSA Debt SSA Analysis Checklist Purpose Parent Country/Countries Guarantee Structure from Parent (Explicit, Maintenance, Implicit) Rating (and Dependency of Rating on Parent) Regulatory Risk Weighting Size of USD Borrowing Program Trading Spread

BMO SSA Cheat Sheet a Good Resource SSA Strategy BMO SSA Cheat Sheet a Good Resource

Overview of USD SSA Market SSA Strategy Overview of USD SSA Market USD SSA Issuance ($ bn) In 2015, USD SSA issuance totaled $217 bn, down slightly from 2014. 2016 supply likely similar to 2015 On average ~75% of SSA deals are benchmark-sized (>=$1 bn). $37 bn in MTN supply in 2015. Global vs. 144a/RegS format. KfW/EIB/IBRD represent ~30% of total USD SSA supply USD SSA Issuance ($ bn)

% of New Issues Bought by Banks (%) SSA Strategy Who Buys USD SSA Debt? On average, banks and central banks purchase almost 80% of new USD SSA issues. Central banks: ~50% of SSA debt purchased. Focus on the safety of FX reserves Banks: Increased from 10% to 35% of SSA purchases due to favorable regulatory capital treatment Distribution of Post-Crisis New Issue SSA Deals (%) % of New Issues Bought by Banks (%) Source: Informa, BMO Capital Markets

SAFETY: Supranationals the Safest Option in the SSA Market SSA Strategy SAFETY: Supranationals the Safest Option in the SSA Market Within the SSA market, supranationals have the strongest credit quality Preferred Creditor Status Backed by Paid-in and Callable Capital from member countries World Bank Loans and Available Capital Source: IBRD Investor Presentation

Source: TradeWeb, , Bloomberg, BMO Capital Markets SSA Strategy LIQUIDITY: Supranational the Most Liquid Option in the SSA Market Most SSA debt is not TRACE eligible, making liquidity measurements difficult. Market Efficiency Coefficient (MEC) is a measure of liquidity, and SSA debt is closing the gap on agencies. Supranationals trade similar to TSY/Agy. Agencies trade more like corporates. MEC Over the Past 5 Years Source: TradeWeb, , Bloomberg, BMO Capital Markets

Source: TradeWeb, , Bloomberg, BMO Capital Markets SSA Strategy LIQUIDITY: SSA Liquidity Improving in Normal Market Conditions Average Bid/Ask spread equal to US agency debt (~3.5 bp). SSA bid/ask spreads roughly equivalent to agencies in normal times, but still vulnerable to drops in stressed market environments. Included in major US fixed income indices (Barc, Citi, BAML). SSA Bid/Ask Spread Relative to US Agencies(bp) Source: TradeWeb, , Bloomberg, BMO Capital Markets

RETURN: How Do SSAs Trade Compared to Agencies? SSA Strategy RETURN: How Do SSAs Trade Compared to Agencies? 3yr Spread to Treasuries 3yr SSA Spreads to Agencies Source: TradeWeb, BMO Capital Markets

Source: TradeWeb, , Bloomberg, BMO Capital Markets SSA Strategy SSA Borrowers at the Forefront of Socially Responsible Investing SSA borrowers were the very first issuers in the green bond market. In 2015, 40% of green bond issuance came from SSA borrowers. 2016 issuance may approach $75 bn following Paris climate accord. SSA institutions are experts in the green bond space, with green frameworks and reporting standards greatly exceeding the standards of other borrowers. Green Bond Issuance ($ bn) Number of Socially Responsible Mutual Funds Source: TradeWeb, , Bloomberg, BMO Capital Markets

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